The US needs more flexible labor markets

The United States is often thought to have an exceptionally fluid labor market, with workers able to easily move across states in response to changing economic conditions. Unfortunately, the famously flexible U.S. labor market has quietly become much less so. Workers are switching jobs at ever lower rates and moving across states less frequently since at least the 1970s. These declines are uneven in magnitude but consistent across states. Workers are also changing occupations at lower rates than in previous decades. On the employer side, firms are creating and destroying fewer jobs over time.

Why does this matter? Institutions that increase labor market flexibility confer a number of benefits: quicker recovery from recession, as workers readily migrate away from hard-hit areas; faster and less costly adjustment to technological change; better employment prospects for those with weak labor force attachment (e.g., the young and those desiring part-time work); and better, more productive matches between workers and firms.

A number of labor market institutions likely impair worker mobility. One example that has been much discussed in recent months is the so-called “non-compete” contract, which restricts the ability of employees to find new work after separating from their original firm. Though we lack information about changes over time in their use, non-compete contracts are now pervasive – nearly a fifth of all workers are bound by one – and likely hamper worker mobility.

Policymakers are considering options to reform the use and enforcement of these contracts, which often appear to exploit workers’ lack of knowledge about their (sometimes quite complicated) implications. Some of the more important policy reforms being considered are: require that employers provide compensation to former employees being asked to abide by non-competes, prohibit non-competes for low-wage workers, and require that that employers be upfront with workers about the terms and enforcement of non-competes.

Another institution that reduces labor market flexibility is occupational licensing. We know that the fraction of U.S. workers holding a license has increased from about 5 to 25 percent over the last 60 years, making licensure a much more important labor market institution than it previously was. We also know that licensing is generally a state policy that requires workers to obtain a new license whenever they move across state lines; this is an obvious impediment to migration. But what does the data say about the mobility of licensed workers?

Newly available worker-level data on licensing provides some striking results. In a new Hamilton Project at Brookings analysis, I show that licensed workers are much less likely than certified workers (those with a credential that is not state-specific or legally required for employment) to move across state lines, but similarly likely to move within state. This suggests that our state-based licensure system is interfering with interstate migration. As licensing has become more prevalent, this impact on long-distance migration has become relevant for more and more workers.

Broadly speaking, there are two primary means of addressing the inflexibility associated with licensure. The first, and most obvious, is to reduce the extent and stringency of licensing laws. If a license is not required for interior design, for instance, then interior designers will not be hindered in their movement across the country, nor will aspiring interior designers find it unnecessarily difficult to enter the occupation. Similarly, reducing the stringency of licensing requirements will help on both dimensions.

An alternative, complementary strategy is to directly address licensing-related barriers to interstate mobility without removing licensing. This can be done in a number of ways. States can form an explicit compact, as they have done for nurses and some other health occupations, that makes it easier to commute across state lines, retain licensed status after a permanent move, or even practice remotely. States can simply recognize other states’ licenses, as they currently do with drivers’ licenses, or provide some form of expedited licensure. In principle, there is nothing about licensing that requires the barriers to geographic mobility we currently experience, though in practice it has proven quite difficult in the U.S. to achieve free mobility for licensed workers.

There is no single solution to the problem of declining U.S. labor market flexibility. Each problematic labor market institution must be addressed separately in a way that makes sense given all the relevant costs and benefits. However, policymakers would do well to place more emphasis on the costs associated with diminished worker mobility: improving our labor market is vital to increasing both individual economic opportunity and overall economic growth.